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Bear of the Day

Target (TGT - Analyst Report), Zacks Rank #5 (Strong Sell), is one of the premier retailers operating in the U.S. and Canada, but has been tagged with falling earnings estimates in recent months.  As a result, this big box retailer may be worth avoiding in front of its November 21st earnings release.

Earnings estimates have fallen:

Earnings estimates for the fiscal years 2014 and 2015 have been reduced materially over the past sixty days.  The Zacks Consensus Earnings per Share Estimate has declined $0.43 to $3.88 for 2014 and $0.43 to $5.00 for 2015.

By comparison, Target’s peers Wal-Mart (WMT), Zacks Rank #4, and Costco (COST), Zacks Rank #3, have seen limited pressure on their earnings estimates.  Wal-Mart’s fiscal year 2014 EPS forecast has been reduced just $.01 to $5.20 and its 2015 estimate shaved $0.02 to $5.73 in the past sixty days. Likewise, Costco has seen its fiscal year 2014 and fiscal year 2015 Zacks Consensus Earnings per Share Estimates each sliced $.08 to $4.97 and $5.52 respectively.

Gross margin has been easing:

Although Target’s grocery business changes the mix of products toward lower margin items, it has seen its gross margin erode in recent quarters.  Gross margin has declined from near 31.0% in 2011 to 30.2% recently.  Analysts are projecting further weakness into the quarter ending January 2014.

Revenue per share growth softening:

Target has seen its sales per share growth rate peak at 10.5% y/y in the middle of 2011.  Growth has slowed to 6.4% y/y through the middle of 2013.  Slower consumer refinance activity, the economic dislocation linked to ObamaCare, and the soft patch in housing demand could generate headwinds to sales.

Comparable store sales have also lost momentum.  After a three quarter average peak of 3.9% y/y in the quarter ending July 2012, same store sales growth averaged just 0.33% y/y in the three quarters to July 2013.

Valuation is uneven:

Target is trading at a rich looking PEG ratio of 1.31 against a median value of 1.17.  However, its 12 month forward PE ratio is less high at 13.5 compared to a median value of 16.3.  The price to sales ratio is 0.6 verses a median of 0.8.  The market has priced Target cautiously given the pressure on earnings and the economic landscape.  By comparison, Wal-Mart trades at 0.5 times sales and with a 12 month forward PE ratio of 13.3.  Costco is priced at 0.5 times sales, but has a higher 12 month forward PE ratio of 22.9.

Alternative:

Those investors looking for a large retail investment may look to Carrefour (CRRFY), Zacks Rank #2. Carrefour’s EPS estimates have held relatively steady in the last sixty days.  The share price has also displayed a steady uptrend in the last year rising from just above $4.00 to a recent high over $7.00.

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